Family businesses are the backbone of many economies, contributing to local communities and global markets. However, there’s a well-known challenge that many of these businesses face, often referred to as the “third-generation curse.” According to the Family Business Institute, approximately “13% of family businesses make it to the third generation, and only about 3% survive to the fourth generation. So why do so many of these businesses falter, and what can be done to reverse this?
We will explore the core reasons behind the third-generation curse and practical strategies that family businesses can use to break free.
What is the “Third-Generation Curse”?
The term “third-generation curse” refers to family businesses that fail to surpass the third generation of leadership. By the time a business reaches this stage, tensions are common as the family expands, and the interests of its members start to diverge. What was once a closely-knit operation with shared goals can become a sprawling network of people with different aspirations and perspectives.
Why does this happen?
The simple answer is that succeeding generations may not have the same emotional connection to the business as the founders did. The passion, vision, and determination that fuelled the original business often get diluted as new family members enter the fold, bringing their ideas, values, and priorities.
But that’s not to say that family businesses are doomed to fail after the third generation. With proper planning and focusing on key areas, businesses can thrive for decades.
The Foundation
One of the first steps in breaking the third-generation curse is understanding the importance of family values in a business. Values give the business its identity and purpose and guide decision-making and unity across generations. Maintaining these values can become difficult as the family grows and evolves.
The Mars family, founders of the global confectionery company Mars, Incorporated, faced significant challenges in maintaining cohesion when the business transitioned into the third generation.
They revitalised and formalised their core values, ensuring that they remained central to decision-making and kept everyone aligned. This approach helped the Mars family preserve their legacy and grow their business into the powerhouse it is today.
Planning for the Future
The second key to breaking the third-generation curse is exit planning. Family members don’t always stay involved in the business, and when someone exits without a plan, it can create financial instability and strain relationships.
Unexpected departures can disrupt operations and lead to conflicts over ownership and control. The Murugappa Group, a large family-owned conglomerate based in India, implemented a clear, well-structured exit plan. This plan allowed family members to exit without causing disruptions to the business. The family could preserve relationships and maintain financial stability as their business grew into the fourth generation by having a roadmap for exits.
Balancing Interests
By the third generation, the emotional ties to the family business are often weaker than they were in the early years. Many third-generation family members have different career goals or financial aspirations, making it harder to agree on matters.
Diverse interests can lead to disagreements over decisions and resource allocation. The Waltons of Walmart implemented a diversified investment strategy and professional management structure. As the family expanded, third-generation members had various interests—some wanted to continue their involvement in the business, while others pursued personal ventures. This approach allowed family members to follow their passions while ensuring Walmart’s continued growth.
Meritocracy vs. Nepotism
One of the biggest challenges for family businesses is maintaining a merit-based system involving family members. Nepotism can undermine the business’s success if family members are given vital roles, they’re not qualified for, leading to poor decision-making and internal tensions and balancing family involvement with the need for competent leadership.
The Ford Motor Company addressed this by establishing policies requiring family members to gain experience outside the business before taking on significant roles. This merit-based approach ensured that leadership positions were filled by the most capable individuals, preserving the company’s success with family involvement.
Breaking the Curse
So, how can family businesses ensure they don’t fall victim to the third-generation curse? The key is addressing tensions head-on by focusing on the four areas we’ve discussed:
- Revisit the core values that drive your business, ensuring they align with the interests of future generations.
- Develop exit strategies allowing family members to transition without disrupting operations or relationships.
- Balance the diverse needs of third-generation members by diversifying investments and implementing professional management to ensure financial stability.
- Avoid nepotism by using transparent hiring and promotion criteria and prioritising skills over family connections.
- Addressing these areas can help family businesses build a solid foundation for future generations, ensuring cohesion, stability, and long-term success.
The third-generation curse is real, but it’s not inevitable. According to the Family Business Institute’s research, while only about 13% of family businesses make it to the third generation, those proactively managing these key areas can break the trend and thrive for future generations.
The future of your family business depends on the decisions you make today. Take the necessary steps to navigate these challenges and build a legacy.
Further Reading:
Family Business Institute. (n.d.). Succession Planning.
Ward, J. L. Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability, and Family Leadership
